Yeah, I know. It almost sounds like I’m asking you to trust a politician.
The market can be erratic and unpredictable. It can bring you great joy, but just as suddenly, inflict great pain. It can easily humble and discourage you.
But the market is actually a more trustworthy entity than any politician. Sure, one of the market’s key drivers is human emotion, but ultimately, it doesn’t owe anyone favors, it doesn’t have any kind of ideology and it doesn’t care about one group of investors more than another.
Unfortunately, for most individual investors, their relationship with the stock market is filtered through TV newscasters, investment advisors, friends, and yes, politicians. Rather than following the market’s overall trend, most people get caught up in day-to-day price swings, and take their cues from others’ opinions of what’s happening.
The truth is, you can see for yourself how the market is really behaving. You don’t have to guess, try and divine the tea leaves or wait for someone else to tell you what to think. Boiling it down to simplest terms: If the market is moving higher, you’d ideally like to see heavier volume. If it’s moving lower, you’d prefer to see lower volume.
Follow Mutual Funds, Other Professional Investors
Trading volume is created by professional investors, like mutual funds, hedge funds and pension funds. Those guys trade gazillions (that’s an exact number) of shares every day. Their trading accounts for about three-fourths of stock market activity.
To put it simply: If they are feeling confident about the economy looking ahead, and about companies’ business prospects, they’ll buy stocks. If they are feeling that companies’ sales and earnings will suffer for any reason, they’ll sell.
And all of that is evident, every day, on a price and volume chart, such as www.freestockcharts.com, which, as the name suggests, costs nothing. It’s made by a company called Worden Bros., which I have no connection with, other than being a paying customer for their other products.
By just glancing at the indexes on one of these charts, you can see if there’s been a lot of heavy selling in recent weeks. That’s a signal that a market rally may be weakening.
And of course, a key piece of our mission here at Simple Growth Investing is to help you recognize and understand those signs, too.
Since we’re here to help you, we absolutely will not insist that you master the minutia of chart-reading. That’s unrealistic, for most people.
Checking Stock Price And Volume
But if you’re able to do a quick, simple check of price and volume, it will enhance your investing and probably help you make (and keep) more money. And because you have a busy life, with other concerns besides the stock market, you don’t have to monitor price and volume throughout the day, as many investing hobbyists do. (And it’s worth mentioning – most of these hobbyists that I’ve encountered over the years are not terribly successful when it comes to making money in the market. They’re more interested in the tools than the outcome.)
And by spotting price and volume changes on your own, it can give you a measure of “BS detection” when it comes to the media talking heads. So if everybody is crowing about a huge price move, you can shake your head and say to your TV, “What a bunch of numbskulls! There was no volume, so that means there was no conviction behind the move!”
So, I’m being a little flippant, but you really don’t have to accept as Gospel truth all the pronouncements from various pundits in the financial media. Keep an open mind, and assess the market based on what it’s actually doing – not what some guy in a suit thinks might happen!
Don’t get me wrong – I enjoy getting the news from financial media. I like staying informed about news that’s moving the markets. But try to watch this stuff with a critical eye. Notice how one so-called expert will appear on a show touting his opinion of what’s on the horizon.
But five minutes later, the next guy will give an opinion that’s 180 degrees different!
Could Both Stock Market Pundits Be Right?
Which one should you believe? From what I’ve seen, most investors believe the person whose view conforms to beliefs they already hold. So if you think that stocks are bound to fall lower, then you’ll be inclined to endorse the views of the commentator who’s bearish. The reverse, of course, also tends to be true.
But here’s why it doesn’t really matter which guy is right: You can see for yourself what’s going on, so you don’t need to trust the opinion (or the agenda) of either one.
Check this out. When markets reverse, either higher or lower, after a strong trend in the opposite direction, investor sentiment usually predicts exactly the opposite reaction. In other words, when a new bull market begins, most investors are dejected, discouraged and ready to stick all their cash under the mattress. Investor sentiment data proves this time and again.
The reverse is also true. Just at the time when a bull rally is weakening, more and more investors and advisors have jumped on the bandwagon. The rally has been underway for several weeks or months, and those who didn’t think the rally had legs have become believers.
But it’s too late, because the professional investors are already selling out. It’s a lesson that repeats over and over again: When the masses become believers, watch out. It’s a story that’s been told many times, but Joe Kennedy, father of President Kennedy, was successful stock operator. He once said that when the guy shining his shoes was giving him stock tips, it was time to get out of the market.
Remember the dot-com bust in 2000? And how everyone under the sun was watching CNBC and following tech IPOs. Same thing. The masses had become entranced with the stock market, but by that time, the pros were seeing the writing on the wall, and were beginning to sell.
And at the time of the 2000 dot-com bust, the major indexes were flashing big sell signals, just as they do every time before a big fall.
So what’s the best way to make sure you don’t get caught up in a major downdraft? It’s simple: Watch the market’ actual signals. Watch for heavy-volume selling after a run-up. Historically, that’s a reliable, proven sign that big investors are taking profits. And because it can take them days or weeks to pare their holdings, that gives the little investor (all of us!) time to exit stocks and keep our gains.
The market went into a new correction in January, 2010. Sure enough, as has happened for decades, there were several days of heavy selling prior to the indexes dropping decisively below key moving averages on January 22.
But as always, that slide wasn’t sudden and unexpected – there were plenty of clues along the way. The Nasdaq declined in heavy selling on Dec. 31, Jan. 12, 15, 20 and 21. The pros were leaving tracks as they bailed out!
Likewise, when the market reversed higher in March, 2009, it began with a monster 7% rise off the bottom on March 10 in big volume. It climbed a little more on March 11, then on March 12 rose almost 4% as volume swelled yet again. Those were your clues: Buyers were back. And if you still weren’t convinced, there was a further 2% rise in huge trading on March 18.
So anytime someone says, “You can’t know when the market will turn,” you can just ignore it. It’s actually very simple to know when a shift is underway. Just follow what the indexes are telling you.
After all, it’s impossible for them to keep secrets – and their action is right there in the open, for everyone to see.
And by following the market’s tracks, you’re making life simpler for yourself. Rather than sort out whose opinion to believe or whose agenda to follow, you’ll see for yourself exactly what is really going on.
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